DOVER, Del. — Attorneys for a group of Tesla shareholders are asking the Delaware Supreme Court to overturn a judge’s decision in favor of CEO Elon Musk in a lawsuit challenging the electric car maker’s $2.4 billion acquisition of a solar panel company founded by two of his cousins.
The plaintiffs argued Wednesday that a Chancery Court judge erred in finding that Tesla’s deal to acquire SolarCity in 2016 was “entirely fair,” even though the judge found that the process by which Tesla’s board of directors negotiated and recommended the deal to shareholders was “far from perfect.”
“Elon was more involved in the process than a conflicted fiduciary should be. And conflicts among other Tesla Board members were not completely neutralized,” former Vice Chancellor Joseph Slights wrote last year. “With that said, the Tesla board meaningfully vetted the acquisition, and Elon did not stand in its way. Equally if not more important, the preponderance of the evidence reveals that Tesla paid a fair price — SolarCity was, at a minimum, worth what Tesla paid for it, and the acquisition otherwise was highly beneficial to Tesla.”
At the time of the acquisition, Musk owned about 22% of Tesla’s common stock and was the largest stockholder of SolarCity, as well as chairman of its board of directors.
A key issue presented to the Supreme Court is Slights’ conclusion that the deal met the heightened scrutiny of Delaware’s “entire fairness” standard.
Typically, under Delaware’s “business judgment” rule, courts give deference to a corporate board’s decision-making unless there is evidence that directors had conflicts or acted in bad faith. If a plaintiff can overcome the business judgment rule’s presumption because the deal involved a controlling shareholder or because directors might have been conflicted, the board’s action is subject to an “entire fairness” analysis. That shifts the burden to the corporation to show that the deal involved both fair dealing and fair price.
Plaintiffs’ attorney Michael Hanrahan argued Wednesday that Slights put too much emphasis on the price Tesla paid for SolarCity, and not enough on the deal process, which the plaintiffs contend was tainted by the failure to appoint an independent committee to negotiate the deal. He also argued that the judge’s analysis of the deal price was flawed, and that shareholders who voted to approve the deal, even though the vote was not required under Delaware law, were not properly informed.
“Musk’s pervasive and undisclosed interference in the process require a legal conclusion of unfair dealing,” Hanrahan said.
“The trial court misapplied entire fairness because it essentially wrote fair dealing out of the standard, holding that the linchpin of entire fairness is fair price,” Hanrahan added. “…Because the Court of Chancery made fair price the foundation of its opinion, if its fair price finding was wrong, the whole house of cards comes down.”
Evan Chesler, an attorney for Musk, noted that the SolarCity acquisition had been a strategic objective for Tesla for 10 years before the deal was completed, belying the argument that it was a last-minute “bailout” to save an insolvent SolarCity from bankruptcy.
Chesler also noted that, despite the judge’s concerns about Musk’s involvement, his ruling includes 10 pages discussing the strengths of the deal process.
“Basically, the appellants seek reversal because they don’t agree with the way the trial court marshaled and weighed the evidence,” he said.
Slights’ ruling last April followed a July 2021 court appearance in which a defiant Musk defended the deal and sparred with attorneys for the plaintiffs, calling one lawyer “a bad human being.” Musk chose to fight the lawsuit in court even after other directors on Tesla’s board reached a $60 million settlement, without admitting fault.
The Supreme Court is expected to issue its ruling within 90 days.
